In a competitive housing market where you can’t always get what you want, it pays to be creative. Why not consider improving your existing home? If you are buying, why not look into a less expensive house that needs a little TLC?
These are questions more and more homeowners are pondering, and today we’ll take a look at home renovation loans, and the different ways you can finance home improvements.
Why Consider a Home Renovation Loan?
Improving Your Existing Home: The primary reason for most home renovation loans is to improve existing homes. If you can see the untapped potential in your pride and joy, home renovation loans mean you won’t need to finance every refurb with cash.
Buying a Fixer-Upper: Often, you might see a house that comes within your budget but needs refurbishing. Home renovation loans can help you achieve what would be tough without further finance so you can get the home of your dreams on a budget.
Whatever the nature of the improvements in question, here are 5 of the leading ways to get funding with home renovation loans.
5 Approaches to Home Renovation Loans
1) Home Equity Loan
If you’ve accumulated any equity in your home, you can borrow against it to finance your refit. This equity represents the difference between the outstanding balance of your mortgage and the value of your house.
Home equity loans (HELs/HELOANs) are paid in advance like a second mortgage with your home as collateral. Interest is usually fixed and due over the term of the loan up to 30 years. Interest rates tend to right slightly higher than with a regular mortgage.
Generally, HELs are limited to 85% of the property’s value. This should still leave ample scope for even ambitious home renovations. You might need to pay closing costs if you’re using this type of financing for home renovation loans but in return, you’ll be rewarded with a single, manageable monthly payment. Check with your tax adviser or CPA to determine whether or not your HEL is tax deductible.
2) Home Equity Lines of Credit
If you’ve got 20% equity or more in your home, a home equity line of credit (HELOC) performs a similar function to a HEL. You’ll be able to borrow against your house using the house itself as security.
HELOCS act much like credit cards offering you a revolving line of credit for a period of up to 20 years. You won’t be liable for any interest until you start using your credit. Adjustable interest rates then apply based on the prevailing prime rate. Once the draw period has elapsed, you’ll need to repay the loan either in a single balloon payment or installments. With HELOCs, closing costs are negligible, and you’ll only start making repayments once you tap into your funds.
3) Unsecured Loan
If you don’t want to use your home as collateral, an unsecured personal loan is how many borrowers approach finding home renovation loans. One of the leading benefits of this type of personal loan is the speed of arrangement. Interests rates can be either fixed or variable and tend to run much higher than you’ll get with home equity loans. Payback terms are more rigid with unsecured loans usually running from 2 to 5 years. Closing costs are likely to be incurred with unsecured loans.
4) FHA 203k Rehab Loan
Otherwise known as rehab loans or FHA construction loans, FHA 203ks are federally-backed renovation loans. If eligible, you can initiate this type of loan when you buy your house or when you want to refinance. To qualify, you must hit the credit, asset, and debt-to-income (DTI) ratio just like with any FHA loan.
You’ll be able to borrow a generous amount since the loan is based on the projected value of the property once renovations are done. All costs are bundled into a single monthly payment, and you’ll only need to pay closing costs once.
5) Cash-Out Refinancing
Some borrowers approach home renovation loans with cash-out refinancing. This type of angle for home renovation loans can help you to reduce your repayment period if your circumstances have improved and you’re looking to pay down your mortgage 5 years quicker. It’s also possible to reset your loan at a more attractive rate.
You’ll need to crunch all the numbers so you can see if the overall cost of the new loan with closing costs and interest still comes out cheaper over the whole term. Since closing costs apply to the entire amount, you might find cash-out refinancing is more expensive than an unsecured loan. Cash-out refinancing is a strong choice if you’re borrowing a substantial amount and you can find a dramatically improved interest rate.
Make an Appointment With Your Mortgage Broker
With so many options at your disposal for home renovation loans, it’s vital you contact your mortgage broker to explore all available financing fully.